FRANKLIN COVEY CO. Management's discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in forward-looking statements are set forth below under the heading "Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995."
We suggest that the following discussion and analysis be read in conjunction
with the Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the fiscal year ended
RESULTS OF OPERATIONS
Overview
Despite the continued difficult economic environment during the first quarter of
fiscal 2021, we were pleased with the continued strength of our subscription
sales and the quick pivot to delivering content "live-online" and through our
other digital modalities. Our subscription service clients are able to access
content and programs from remote locations, which allows continued engagement of
personnel and students during long periods of displacement from normal working
or classroom conditions. To be successful in our industry, it is important to
create effective learning environments for our clients and students, and we
believe our previous investments in digital and remote delivery modalities are
key to surviving and then thriving in the current environment. According to the
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Our financial results for the quarter ended
?Sales - Our consolidated sales for the first quarter of fiscal 2021 totaled
At
?Cost of Sales/Gross Profit - Our cost of sales totaled
?Operating Expenses - Our operating expenses for the quarter ended
?Income Taxes - We recorded
?Operating Loss and Net Loss - As a result of improved gross margins and
decreased SG&A expense, our loss from operations for the quarter ended
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?Cash Flows from Operating Activities - Our cash flows from operating activities
increased 59 percent to
Further details regarding our fiscal 2021 first quarter results are provided throughout the following management's discussion and analysis.
Quarter Ended
Enterprise Division Direct Offices Segment
The Direct Office segment includes our sales personnel that serve clients in
Quarter Ended Quarter Ended
November 30, % of November 30, % of
2020 Sales 2019 Sales Change
Sales $ 36,743 100.0 $ 42,111 100.0 $ (5,368)
Cost of sales 7,304 19.9 10,700 25.4 (3,396)
Gross profit 29,439 80.1 31,411 74.6 (1,972)
SG&A expenses 22,746 61.9 25,701 61.0 (2,955)
Adjusted EBITDA $ 6,693 18.2 $ 5,710 13.6 $ 983 Sales. During the first quarter of fiscal 2021 our All Access Pass subscription
revenues remained strong and increased 16 percent over the first quarter of
fiscal 2020, while annual AAP revenue retention remained above 90 percent for
the first quarter of fiscal 2020. We continue to be encouraged by the durability
of AAP sales as clients were able to quickly transition to and effectively
utilize the digital delivery options available through the All Access Pass. As a
result of this successful transition, our invoiced add-on services are
recovering and were nearly even with the prior year in the
Gross Profit. Gross profit decreased due to sales performance in the quarter as described above. Direct Office gross margin increased due to increased subscription sales in the mix of services and products sold during the quarter.
SG&A Expense. Decreased Direct Office SG&A expense was primarily due to reduced travel and entertainment expense; decreased marketing expense; and cost savings initiatives which were implemented as a result of the COVID-19 pandemic.
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--------------------------------------------------------------------------------International Licensees Segment
In countries or foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our international licensee operations for the periods indicated (in thousands):
Quarter Ended Quarter Ended
November 30, % of November 30, % of
2020 Sales 2019 Sales Change
Sales $ 2,596 100.0 $ 3,721 100.0 $ (1,125)
Cost of sales 311 12.0 601 16.2 (290)
Gross profit 2,285 88.0 3,120 83.8 (835)
SG&A expenses 991 38.2 1,085 29.2 (94)
Adjusted EBITDA $ 1,294 49.8 $ 2,035 54.7 $ (741) Sales. International licensee revenues are primarily comprised of royalty
revenues. At the onset of the COVID-19 pandemic, our licensee operations had not
established strong subscription businesses and were heavily reliant on live,
onsite presentations. Despite the ongoing difficulties associated with the
pandemic and its impact on live gatherings, we are encouraged by the recovery of
our licensee operations as they are adapting to conditions and increasing
digital online presentations. On a sequential basis, licensee revenues increased
95 percent over the fourth quarter of fiscal 2020. The continued recovery of our
licensee segment is highly dependent upon the re-opening of foreign economies,
the implementation of digital delivery in these countries, and the ability or
willingness of people to travel and meet together in groups. We have translated
AAP content into multiple languages and we believe the electronic availability
of our offerings through this platform may accelerate the recovery of licensee
operations if they can effectively market, adapt, and sell this online
technology to their clients. Foreign exchange rates had an immaterial impact on
international licensee sales and operating results during the quarter ended
Gross Profit. Gross profit decreased due to lower sales as previously described. Gross margin improved primarily due to the mix of revenue recognized during the quarter, which included less product sales than in the prior year.
SG&A Expense. International licensee SG&A expenses decreased primarily due to cost reduction initiatives implemented in response to lower revenues.
Education Division
Our Education Division is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed Leader In Me program designed for students primarily in K-6 elementary schools. The following comparative information is for our Education Division in the periods indicated (in thousands):
Quarter Ended Quarter Ended
November 30, % of November 30, % of
2020 Sales 2019 Sales Change
Sales $ 7,498 100.0 $ 11,082 100.0 $ (3,584)
Cost of sales 3,512 46.8 4,425 39.9 (913)
Gross profit 3,986 53.2 6,657 60.1 (2,671)
SG&A expenses 6,271 83.6 7,759 70.0 (1,488)
Adjusted EBITDA $ (2,285) (30.5) $ (1,102) (9.9) $ (1,183) Sales. Education Division sales for the quarter ended
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as renewal trends are improving and new schools continue to be added. As of
Gross Profit. Education Division gross profit decreased primarily due to decreased sales as previously described. Education segment gross margin declined compared with the prior year primarily due to the fixed cost of coaches, who are salaried, over less days delivered than in the first quarter of the prior year.
SG&A Expenses. Education SG&A expense decreased primarily due to reduced travel expenses as some programs were postponed or canceled during the quarter, reduced variable associate costs resulting from decreased sales, and cost savings from initiatives implemented in response to the pandemic.
Other Operating Expense Items
Depreciation - Depreciation expense increased
Amortization - Amortization expense decreased slightly compared with the first
quarter of the prior year due to the full amortization of certain intangible
assets. We expect amortization expense will total
Income Taxes
Our income tax provision for the quarter ended
We paid
LIQUIDITY AND CAPITAL RESOURCES
Introduction
In the current environment of reduced sales and an uncertain path to economic
recovery, a major priority of ours is the continued maintenance and preservation
of liquidity. Our cash and cash equivalents at
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In anticipation of potential covenant compliance issues associated with the
COVID-19 pandemic and the uncertainty of the economic recovery, on
1.Minimum Liquidity - We must maintain consolidated minimum liquidity of not
less than
2.Minimum Adjusted EBITDA - We must maintain rolling four-quarter Adjusted EBITDA not less than the amount set forth below at the end of the specified quarter (in thousands).
QUARTER ENDING AMOUNTAugust 31, 2020 $ 11,000 November 30, 2020 8,500February 28, 2021 5,000May 31, 2021 15,000
Adjusted EBITDA for purposes of this calculation is not the same as generally reported by the Company in its quarterly earnings. The amounts in the table above exclude amortization of capitalized development costs which is classified in cost of sales.
3.Capital Expenditures - We may not make capital expenditures, including
capitalized development costs, in an amount exceeding
In addition to the new financial covenants described above, we are prohibited from making certain restricted payments, including dividend payments on our common stock and open-market purchases of our common stock until we have been in compliance with the previously existing financial covenants for two consecutive quarters.
In the event of noncompliance with these financial covenants and other defined
events of default, the lender is entitled to certain remedies, including
acceleration of the repayment of any amounts outstanding on the 2019 Credit
Agreement. At
In addition to our term-loan obligation and borrowings on our revolving line of credit, we have a long-term rental agreement on our corporate campus that is accounted for as a financing obligation.
The following discussion is a description of the primary factors affecting our
cash flows and their effects upon our liquidity and capital resources during the
quarter ended
Cash Flows From Operating Activities
Our primary source of cash from operating activities was the sale of services to
our customers in the normal course of business. Our primary uses of cash for
operating activities were payments for selling, general, and administrative
expenses, payments for direct costs necessary to conduct training programs,
payments to suppliers for materials used in training manuals sold, and to fund
working capital needs. Despite the operating difficulties resulting from the
COVID-19 pandemic in the first quarter of fiscal 2021, our cash provided by
operating activities increased 59 percent to
Cash Flows From Investing Activities and Capital Expenditures
Our cash used for investing activities during the first quarter of fiscal 2021
totaled
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We spent
Our purchases of property and equipment the first quarter of fiscal 2021
consisted primarily of computer software and hardware. We will continue to
invest in our content and delivery modalities, including the AAP and Leader in
Me subscription services, and currently anticipate that our purchases of
property and equipment will total approximately
Cash Flows From Financing Activities
During the first quarter of fiscal 2021, our net cash used for financing
activities totaled
On
Sources of Liquidity
We expect to meet our obligations on the 2019 Credit Agreement, service our
existing financing obligation, pay for projected capital expenditures, and meet
other working capital requirements during fiscal 2021 from current cash balances
and future cash flows from operating activities. Going forward, we will continue
to incur costs necessary for the day-to-day operation of the business and may
use additional credit and other financing alternatives, if necessary, for these
expenditures. Our 2019 Credit Agreement expires in
We believe that our existing cash and cash equivalents, cash generated by operating activities, and availability of external funds as described above, will be sufficient for us to maintain our operations for at least the upcoming 12 months. However, our ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, the length and severity of business disruptions associated with the COVID-19 pandemic, our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors. Some of the factors that influence our operations are not within our control, such as general economic conditions and the introduction of new offerings or technology by our competitors. We will continue to monitor our liquidity position and may pursue additional financing alternatives, as described above, to maintain sufficient resources for future growth and capital requirements. However, there can be no assurance such financing alternatives will be available to us on acceptable terms, or at all.
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--------------------------------------------------------------------------------Contractual Obligations
We have not structured any special purpose entities, or participated in any
commodity trading activities, which would expose us to potential undisclosed
liabilities or create adverse consequences to our liquidity. Required
contractual payments primarily consist of rental payments resulting from the
sale of our corporate campus (financing obligation); repayment of term loan
obligations; expected contingent consideration payments from business
acquisitions; short-term purchase obligations for inventory items and other
products and services used in the ordinary course of business; operating lease
payments; and payments for outsourced warehousing and distribution service
charges. For further information on our contractual obligations, please refer to
the table included in our annual report on Form 10-K for the fiscal year ended
ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED
Refer to the discussion of new accounting pronouncements as found in Note 1 to the financial statements as presented within this report.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements were prepared in accordance with
accounting principles generally accepted in
Estimates
Some of the accounting guidance we use requires us to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements. We regularly evaluate our estimates and assumptions and base those
estimates and assumptions on historical experience, factors that are believed to
be reasonable under the circumstances, and requirements under accounting
principles generally accepted in
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements made by the Company in this report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and Section 21E of the Securities Exchange Act of 1934 as amended (the
Exchange Act). Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate, or imply future results,
performance, or achievements, and may contain words such as "believe,"
"anticipate," "expect," "estimate," "project," or words or phrases of similar
meaning. In our reports and filings we may make forward-looking statements
regarding, among other things, our expectations about future sales levels and
financial results, our financial performance during fiscal 2021, expected
effects from the COVID-19 pandemic, including effects on how we conduct our
business and our results of operations, the timing and duration of the recovery
from the COVID-19 pandemic, future training and consulting sales activity,
expected benefits from the All Access Pass and the electronic delivery of our
content, anticipated renewals of subscription offerings, the impact of new
accounting standards on our financial condition and results of operations, the
amount and timing of capital expenditures, anticipated expenses, including SG&A
expenses, depreciation, and amortization, future gross margins, the release of
new services or products, the adequacy of existing capital resources, our
ability to renew or extend our line of credit facility, the amount of cash
expected to be paid for income taxes, our ability to maintain adequate capital
for our operations for at least the upcoming 12 months, the seasonality of
future sales, future compliance with the terms and conditions of our line of
credit, the ability to borrow on our line of credit, expected collection of
accounts receivable, estimated capital expenditures, and cash flow estimates
used to determine the fair value of long-lived assets. These, and other
forward-looking statements, are subject to certain risks and uncertainties that
may cause actual results to differ materially from the forward-looking
statements. These risks and uncertainties are disclosed from time to time in
reports filed by us with the
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and 10-K. Such risks and uncertainties include, but are not limited to, the
matters discussed in Item 1A of our annual report on Form 10-K for the fiscal
year ended
The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. In addition, the stock markets in general have experienced increased volatility. Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock. In addition, the price of our common stock can change for reasons unrelated to our performance. Due to our low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.
Forward-looking statements are based on management's expectations as of the date
made, and we do not undertake any responsibility to update any of these
statements in the future except as required by law. Actual future performance
and results will differ and may differ materially from that contained in or
suggested by forward-looking statements as a result of the factors set forth in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in our filings with the
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